Europe's Q2 2023 energy supply concerns ease on healthy stocks, lower demand

Europe is headed into the second quarter -- and the key summer storage filling season -- in much better shape than many had expected, with stocks still healthy and LNG deliveries relatively strong.

A mild winter -- fortuitous and well-timed given the loss of significant volumes of Russian pipeline gas -- helped keep a lid on demand.

And prices, while still historically high, are well down from August's record levels, with injection demand likely to be relatively muted this summer given the high level of stocks as Europe exits winter.

Platts, part of S&P Global Commodity Insights, assessed the benchmark Dutch TTF month-ahead price at Eur43.28/MWh on March 30, down from an all-time high of almost Eur320/MWh in late August.

However, EU member states remain tied to mandatory storage filling targets and prices may have to stay high to continue to attract LNG cargoes.

"The weaker price environment in Europe since late February is a 'false comfort' and masks a hyper-sensitive new reality for European gas markets," Alun Davies, Senior Director at S&P Global Commodity Insights, said.

"Gas prices must stay high enough to sustain LNG deliveries into Europe and constrain European demand sufficiently to allow gas storage to reach targeted levels through the summer," Davies said.

Traders also believe the current European gas price could be a floor. "We are in a crucial period and the following weeks will determine the price movement," a European trader said. "Technically, we seem to have reached a bottom."

Another EU-based trader said that while prices had come down, there was still some upside risk. "The bears are out there -- but you may want to call this still hibernating," the trader said.

Much in the second quarter will depend on the rate of storage filling, with EU storage sites still filled to 56% of capacity as of March 28. EU member states are obliged to reach 90% fullness by Nov. 1.

According to S&P Global forecasts, European sites are forecast to be 67% full by the end of June. And if there is a rush to fill storage sites earlier rather than later this summer, there could be a lack of injection demand headed into the third quarter.

The level of demand in other sectors will also be key, especially in the price-sensitive industrial sector, which is seen as a major swing area of consumption.

S&P Global forecasts that total EU 27+UK gas demand will average 799 million cu m/d in the second quarter, down 6% compared with 848 million cu m/d in Q2 2022.

LNG supplies to Europe over the summer will also be key, as will any uptick in Chinese spot LNG buying that could see cargoes diverted away from European markets.

S&P Global forecasts that European LNG imports -- while still historically high -- in the second quarter will be lower year on year as a result of the more comfortable storage situation and lower demand.

As part of the EU's efforts to strengthen supply security, its new gas demand aggregation and joint purchasing platform AggregateEU is set to be up and running by mid-April, with the first joint purchasing tender to follow in May.

EU member states will be required to aggregate a minimum of 15% of the EU-mandated 90% storage target for 2023, with at least 24 Bcm of gas demand already submitted to AggregateEU.

This includes additional gas demand aggregation from Ukraine, Moldova and Serbia.

Joint purchasing of gas, however, will remain voluntary. The platform's matching algorithm will take shape through a series of rolling tenders, while gas purchase agreements will then be done outside of the platform.

Once agreed, the EU can appoint either a "central buyer" or a larger buyer acting on behalf of smaller ones to facilitate the joint purchasing process.

Related infographic: Europe's Q2 2023 energy supply concerns ease on healthy stocks, lower demand

Near-term power bearish

European power prices enter the second quarter of 2023 at their lowest level since summer 2021. With demand weak, feedstock prices weak and renewables strengthening there is no sign yet of last year's volatility.

Power demand for the quarter is forecast to fall by 3.5% year on year, according to S&P Global analysts, with only modest upside risk from late cold snaps or early heatwaves.

Meanwhile, rising wind and solar capacity combined with improved hydro conditions are forecast to reduce Europe's demand for fossil generation by 21 GW in the period.

Within this shrinking thermal gap, new gas units have started to sideline older coal units.

Falling gas and rising carbon prices have seen a return of coal-to-gas switching, but volumes at play are fairly limited.

With Germany on course to close its remaining three reactors in April, meanwhile, the sector's focus will double down on French nuclear availability, with S&P Global seeing ongoing strikes cutting 1.5 GW from average second-quarter output.

Elsewhere, Finland will finally see the 1.6-GW Olkiluoto-3 reactor start commercial operation.

Meanwhile, the impact of Europe's solar boom, with more than 40 GW added last year, is already being felt; Germany and Spain lead the pack, with bearish midday price trends anticipated to accelerate through the second quarter.

S&P Global forecasts solar in 10 European markets to match average gas-fired generation in the second quarter.

France is expected to return to net export status as weak domestic demand combines with relatively improved nuclear output, despite strikes and knock-on maintenance delays.

A repeat of last year's exports from Britain and Iberia seems unlikely amid much smaller gas hub differentials, removing Spain's advantage under the country's gas for power cap.

While spring fundamentals appear to be generally bearish, more bullish factors could loom later in the summer, S&P Global's head of European power analysis Glenn Rickson said.

"After an unusually dry and hot summer last year and with climate (as opposed to just weather) risk a growing concern, the market is naturally concerned about a repeat performance for the coming summer, not helped by reviving concerns around French nuclear as a result of ongoing strikes and low snowpack in the Alps, which has led to concerns over hydro dispatch," he said.

A summer stress test scenario, assuming a heatwave, would lift average summer demand (April to September) by 3% and result in 18 GW of additional gas and coal generation.

This could yield a baseload power price increase of up to Eur15/MWh in August, Rickson said.

Carbon volatility

European carbon prices are likely to remain volatile into the second quarter of 2023, with the market particularly sensitive to bullish technical factors balanced by worries over the global economy.

Carbon permits under EU's Emissions Trading Scheme have oscillated between Eur83-101/mtCO2 in the first quarter, with prices seen likely to stay in a similar range in the second quarter.

Increased investor interest and steady annual compliance demand will be balanced by macroeconomic concerns and quicker coal-to-gas switching in power production, according to analysts. Prices are also likely to get some support in the immediate term from slightly higher gas and power prices in Europe.

Into the third quarter, meanwhile, the European Commission has confirmed that allowance auctions under the REPowerEU deal are expected to commence from July, which may put some pressure on prices as more allowances come into the market.

"For our EUA price view, lower-than-expected auction volumes (compared with our previous forecast) brought forward in 2023 may keep monthly average prices higher than our current forecast this year, but we still expect a bearish trend in Q2 as participants prepare for increases in the monthly auction volume from July," said S&P Global carbon analyst Michael Evans.